Rigging the Rules: The Next Corporate Sting

February 2, 2015

Robert Borosage

President Obama rolls out his budget today, triggering the next salvos in the debate about America’s future. The president’s budget calls for ending the destructive caps on federal spending known as the “sequester.” It would make vital investments in infrastructure, education, and R&D, and begin paying for making two years of community college free for all, a first step to a K-16 public education plan. It would raise taxes on the wealthy to help pay for tax breaks for working parents. Democrats are rallying to support it.

Republican leaders have already pronounced it “dead on arrival.” Led by Rep. Paul Ryan, they will demonstrate their continued preference to starve public programs and savage the most vulnerable rather than ask the rich and corporations to pay a little more in taxes. Attentive citizens will know exactly who is on what side.

One proposal of the president’s may well survive, although not at the levels he proposes. And this provides a clear example of how the rules get rigged to benefit the few and skewer the many. Consider it the next great multinational corporate sting. With Americans as the patsies.

The Scandal is What is Legal

Global corporations have managed to create a perverse tax dodge in the U.S. tax code. Any profits they make or report abroad can be squirreled away – deferred – tax-free until they are “repatriated” – brought back for use in the U.S. Large global corporations find creative ways to report billions of profits in tax havens like the Cayman Islands. Then they lobby fiercely for a one-time tax “holiday” to bring the money back home, promising it will produce jobs and investment.

The last time they pulled this scam, they got a huge tax break and the money was largely used for mergers and stock buybacks, hiking the bonuses of the executive suite and doing virtually nothing for jobs. Worse, more corporations decided they could benefit from the scam, and started reporting more of their profits abroad. Only small business and patriotic corporations face the nominal corporate tax rate of 35 percent. Now some $2 trillion dollars resides sheltered from US taxes, and the lobbying for another holiday has grown fierce.

The U.S. also has a large and growing public investment deficit. Our infrastructure – everything from roads to schools to sewer and water systems – is so decrepit that it threatens lives. Even the Chamber of Commerce, rabid center of the anti-tax, anti-government corporate lobby, has called for spending more on infrastructure. But Republican legislators are so terrified by the anti-tax crusaders, they can’t even bring themselves to hike the gas tax at a time of plummeting gas prices to cover maintaining the roads.

Corporations want a tax holiday; the country desperately needs to rebuild its infrastructure. It didn’t take a rocket scientist to plot the new sting. The corporations enlisted former Obama staffers to lobby for letting the corporations bring back the money at a marginal tax rate – 6.5 percent was often bruited about – and use the taxes collected to pay for infrastructure, or fund an “infrastructure bank.”

Soon Bill Clinton was on board, even pitching the idea to bemused Georgetown students in his elaborate defense of his administration’s economic policies. Former Rep. Dave Camp, then chair of the House Ways and Means Committee, included the idea in his comprehensive tax reform program, offering global corporations a tax rate of 8.5 percent to bring the money home (a rate the corporate lobby scorned as too high). This session, liberal California Sen. Barbara Boxer joined with libertarian Republican Sen. Rand Paul to offer the full flop: a 6.5 percent tax holiday.

In his budget, President Obama joins in the bidding. His plan demands a higher price. He would offer a one-time tax rate of 14 percent for overseas profits held abroad – whether “repatriated” or not – the money to help fund nearly $500 billion in infrastructure spending over six years. He’d make this part of “revenue neutral” corporate tax reform, that would lower the top rate to 28 percent, close loopholes and not ask corporations to contribute one dime to deficit reduction or vital investments. He’d levy a permanent tax of 19 percent on profits reported abroad (with a credit for any taxes paid to a foreign country).

The effect is perverse. As Bloomberg reported, “A 19 percent minimum tax on foreign earnings – without an extra layer of tax upon repatriation – could give companies an incentive to move profits overseas.”

Now 14 percent on all profits stashed abroad is better than 6.5 percent on those supposedly “repatriated.” And a 19 percent permanent tax is better than deferral. But in rolling out his budget, the president said he learned that it was better to tell Americans what he thought should be done, than to compromise pre-emptively. So why not simply end deferral and tax multinational profits at the same rate as those of domestic businesses? Why give companies an incentive to move production or report profits abroad?

The Bidding Has Only Just Begun

Worse, the president’s proposal is just the opening bid. Corporate lobbyists are salivating about the bidding war that is about to take place. The president has accepted the principle of a tax holiday to pay for badly needed infrastructure spending. Now the question is simply a matter of price.

There is a hoary, apocryphal, sexist story about Churchill that summarizes our situation. Churchill was said to be seated next to a fancy socialite at a grand dinner. Tired of her airs, Churchill supposedly asked:

“Madam, would you sleep with me for five million pounds?”

“My goodness, Mr. Churchill,” she responded, “Well, I suppose…we would have to discuss terms, of course.”

Churchill: “Would you sleep with me for five pounds?”

Socialite: “Mr. Churchill, what kind of woman do you take me for?”

Churchill: “Madam, we’ve already established that. Now we are haggling about the price.”

This is how the rules get rigged. We desperately need to rebuild America. The anti-tax lobby stops sensible tax hikes. The corporate lobby grabs the opportunity. Bipartisan support builds for another sting. And we wonder how the 1 percent has managed to capture virtually all of the country’s income growth, while the middle class continues to sink.

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About Robert Borosage

Robert L. Borosage is a senior advisor to People's Action and writes widely on political, economic and national security issues. He is a Contributing Editor at The Nation magazine, and his articles have appeared in The American Prospect, The Washington Post, the New York Times and the Philadelphia Inquirer.